Educational Articles

In this screen we are taking a look at stocks in the Telecom Services, and Telecom Equipment industries. Although these two sound very similar to one another, there are stark differences between them, and even between individual stocks in each group.

The Telecom Services group includes several integrated telcos, which provide wireline, wireless, and other nontraditional services. Companies in this industry may have traditional wired operations, but most rely heavily (or solely) on wireless service for their revenues. Yields in this group are normally attractive, though not as high as those in the Telecom Utility space.

Companies in the Telecommunications Equipment Industry produce technologies and services that are used to facilitate people's communications. Major products include cell phones, chipsets, wireless and landline infrastructure equipment, digital subscriber-line (DSL) and cable modems, and networking devices, such as routers and switches. The industry's customer base is highly diversified, including multi-national corporations, telephone companies, governments, universities, institutions, commercial businesses and consumers. Stocks in this group normally have lower dividend yields than Telecom Services.

To create our list, we ran a simple screen of companies in those industries with projected annual percentage change in total return over the next three to five years of 10% or higher. The 30 names that came up are listed below. From the list, we have chosen to highlight two companies, Broadcom (BRCM), and Verizon (VZ – Free Verizon Stock Report).

Broadcom

Broadcom is a leading designer of semiconductor solutions (for wired and wireless communication devices) that can operate complex signal processing, convert digital data to and from analog signals, and switch and route packets of information over IP-based networks. Its products, which deliver voice, video, data and multimedia connectivity in the home, the office and the mobile environment, include system-on-a-chip, or SoC, and embedded software solutions. The company’s portfolio is represented through three segments: Mobile and Wireless (Solutions for the Hand), accounted for 47% of June-period product and licensing revenues; Broadband Communications (Solutions for the Home), 28%; and Infrastructure and Networking (Infrastructure), 25%.

Although the ongoing struggle to gain market share from competitor, Qualcomm (QCOM), will likely persist for some time going forward, the company’s presence in high-demand markets, such as Passive Optical Networks, data centers, and Wi-Fi, and its portfolio of relevant technology should stimulate growth in the coming years. Specifically, new mobile devices and innovative Wi-Fi chipsets, especially those related to newer technology like Near Field Communications (NFC), will be some strong points here, fueling top- and bottom-line gains over the short and long term. On another note, acquisitions may be another growth vehicle going forward, based on the company’s buying behavior of late.

These solid prospects have been discounted by the investment community of late because of some weaker-than-expected guidance and a slowdown in the company's smartphone modem business. Although we believe it will be difficult to gain share from the dominant Qualcomm in the baseband space, we do not think the stock should have been punished as much as it did since basebands have long been only a small part of its business. Also, if Broadcom shows any intent to exit the space completely, the shares will likely rise from their current spot near the 52-week low.

Notably, Broadcom initiated a dividend in March of 2010. The company’s quarterly payout, which has risen by a penny for four consecutive years, now rests at $0.44 a share. Indeed, the yield is in the upper half of all Telecom Services, and Telecom Equipment companies under Value Line review. Moreover, additional dividend hikes are projected down the line, thus, these shares offer above-average total return potential over the 2016-2018 time frame.

Verizon

Verizon is one of the leading providers of communications, information, and entertainment products and services to consumers, businesses, and governmental agencies throughout 150 countries globally. Indeed, the company predominantly offers voice, data, and video services through its two reportable segments: Wireless and Wireline.

Renowned provider of voice and data services, Verizon Wireless, and its fourth-generation (4G) Long-Term Evolution (LTE) network, continue to dominate the market. In fact, the deployment of its 4G LTE network is virtually completed, and is now offered in all 50 states, covering a population of about 300 million. This business accounted for 67% of total revenues, as of June 30th. Its Wireline segment, 33%, offers communication products and services, such as voice, broadband data and video services, network access, long distance, and owns and operates an end-to-end global Internet Protocol (IP) networks. Notably, FiOS and other strategic services, such as cloud computing security and IT solutions, advanced communications, strategic networking, and telematics services, are associated with that line. This business is separated into four categories: Mass Markets, Global Enterprise, Global Wholesale, and Other.

The increasing popularity of smartphones, tablets, and other Internet devices, which results in year-over-year advances in retail connections, should continue to generate stand-out performances going forward. Moreover, investments in the 4G LTE network and FiOS products and services will likely prove profitable. Thus, management announced an increase in its capital spending outlook for full-year 2013 to between $16.4 billion and $16.6 billion, up $2 billion-$4 billion from 2012. This improved guidance also relates to the deployment of its AWS (advanced wireless services), which is expected to be rolled out later this year. Meanwhile, cost containment efforts should keep margins in check. All in all, Verizon’s ground-breaking initiatives, combined with other offerings like the Share Everything Plan and the introduction of next-generation mobile devices (including the Pantech Perception, the Nokia Lumia 928, the Casio G’zOne Commando 4G LTE, the Blackberry Q10, the Samsung Galazy S4, and the HTC One) should not go unnoticed by the investment community. Indeed, the outlook is relatively bright for the telecommunications giant and Dow-30 component.

Dividend hikes have been a common pastime for this telecom company; the payout has increased each year since 2006. In 2013, the annual dividend will be $2.06 a share, assuming management maintains its quarterly distribution of $0.515. As a result, income-seeking accounts may find Verizon’s generous yield to be intriguing, as it more than doubles the Value Line median. Looking ahead, shareholders can expect additional dividend growth over the 3- to 5-year period, as Analyst Kenneth A. Nugent predicts the annual payout to be more than $2.20 a share over the 2016-2018 period, which should produce an appealing total return.

Company

Ticker

Industry Name

Riverbed Technology

RVBD

Telecom. Equipment

Arris Group

ARRS

Telecom. Equipment

Verifone Systems

PAY

Telecom. Equipment

Polycom, Inc.

PLCM

Telecom. Equipment

NETGEAR

NTGR

Telecom. Equipment

NII Holdings

NIHD

Telecom. Services

NTELOS Hldgs.

NTLS

Telecom. Services

UTStarcom Holdings

UTSI

Telecom. Equipment

Broadcom Corp. 'A'

BRCM

Telecom. Equipment

Cbeyond, Inc.

CBEY

Telecom. Services

Gen'l Communic. 'A'

GNCMA

Telecom. Services

Marvell Technology

MRVL

Telecom. Equipment

T-Mobile US

TMUS

Telecom. Services

TELUS Corporation

T.TO

Telecom. Services

America Movil

AMX

Telecom. Services

Juniper Networks

JNPR

Telecom. Equipment

Motorola Solutions

MSI

Telecom. Equipment

Shenandoah Telecom.

SHEN

Telecom. Services

Telecom N. Zealand

NZTCY

Telecom. Services

F5 Networks

FFIV

Telecom. Equipment

AT&T Inc.

T

Telecom. Services

Black Box

BBOX

Telecom. Equipment

Ericsson ADR

ERIC

Telecom. Equipment

Sprint Corp.

S

Telecom. Services

Tellabs, Inc.

TLAB

Telecom. Equipment

Vodafone Group ADR

VOD

Telecom. Services

Dycom Inds.

DY

Telecom. Services

Qualcomm Inc.

QCOM

Telecom. Equipment

Verizon Communic.

VZ

Telecom. Services

ADTRAN, Inc.

ADTN

Telecom. Equipment

At the time of this article's writing, the author did not have positions in any of the companies mentioned.